Using The Budget For Target Practice

In the recent White House budget, Obama dropped “chained CPI” – reductions to social security benefits that were supposed to be part of a grand bargain on deficit reduction. Stan Collender puts the move in context:

The reports said that the Social Security plan was dropped because the administration realized it made no sense to propose something that (1) was not going to be well received by Democrats, (2) would not generate bipartisan cooperation from Republicans, (3) would likely cost Democrats votes (and maybe seats) in November and (4) had no chance whatsoever of being enacted. There was no grand budget bargain in the offing so why bother.

But the decision to drop the Social Security plan actually has additional implications that were not covered. It demonstrates that the president’s budget — I’m talking about any president and not just the current one — has become a liability and no longer has much positive value as far as the fiscal policy debate is concerned.

He thinks that president’s budget has become useless since the “president’s proposals have stopped being the place where discussions begin and instead just give Congress something to criticize and reject out-of-hand.” Chait thinks Republicans are losing the budgetary long game:

What I genuinely don’t grasp is the calculation from the long-term perspective of the conservative movement.

While I don’t come close to sharing their bug-eyed fear about the scope of the long-term deficit, I do agree that at some point, a fiscal correction will probably be needed. Now here is an important political-economic reality undergirding this long game. It’s politically feasible to cut future retirement benefits, but it’s not feasible to cut current retirement benefits (as even Republican hard-liners agree.) The longer any such correction is postponed, the longer current benefits are locked in. Every year a deal is delayed, the harder it gets to cut spending, and thus the easier it gets to raise taxes. Bolstering this reality is a simple political dynamic: cutting retirement benefits is wildly unpopular. If forced to choose, people would overwhelmingly prefer to raise taxes.

Since Social Security benefits are modest, and since most beneficiaries have little other income, no one should propose a cut in benefits casually. We’ve said time and again that the chained CPI is worth considering only if two crucial conditions are met:

• First, measures to protect the very old and low-income people must be an essential part of the chained CPI; the Administration included these features in last year’s proposal.

• Second, even with such protections, the chained CPI must be part of a larger budget package that shrinks long-term deficits significantly and does so in a fair and balanced manner by including measures that raise significant revenue in a progressive manner.

Now the demise of this idea is no great loss. Two big problems (beyond Obama’s progressive base hating it): first, this new inflation measure would do a poor job of accurately reflecting prices changes for seniors. Second, switching to chained CPI would be a big long-term, middle-class tax hike. By also lowering annual inflation adjustments to the tax code, chained CPI would, as AEI’s Andrew Biggs has noted, “reduce the value of credits and deductions and push a greater share of workers’ incomes into the higher tax brackets. Result: higher taxes, and particularly so on low and middle class households.”